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Capital Allowances Question

  • 05-12-2014 5:46pm
    #1
    Finance Grad 2015
    Registered Users, Registered Users 2 Posts: 40 ✭


    Hi All,

    I need help with this Capital Allowances question... I've read all the books etc but I just can't seem to get my head around it.
    Can anybody tell me the layout of the answer... this is where I'm getting stuck... I don't know how to actually calculate it. Depreciation always gets me confused.

    Thanks! :):)

    Cresswell plc is considering investing in a new product.

    • An initial investment of €800,000 would be required comprising plant and machinery of €500,000 and working capital of €300,000. The investment would last for 4 years.

    • Additional sales revenue would be generated at €400,000 per year and additional production costs would be €180,000 per year.

    • Additional fixed costs of €20,000 per year would be incurred and in addition the company would allocate fixed costs to the project of €15,000 per year.

    • At the end of the project's life (year four) the machinery would be sold for €80,000 and the working capital could be recovered in full in year five..

    • The Company uses straight line depreciation.

    • For a project of this nature the company use a 10% discount rate.

    You are required to


    iii. Explain the effects tax has on project appraisal. You are told that Cresswell pays tax at 30% and that capital allowances are available at 12.5% on a straight line basis on the machinery. Recalculate the NPV on this basis


Comments

  • #2
    Alan Shore
    Registered Users, Registered Users 2 Posts: 735 ✭✭✭Alan Shore


    Assuming you have done the computation without the inclusion of the tax benefits of Capital Allowances.

    So you have 500,000 x 12.5% = 62,500 in cap alls so a tax reduction of 7,812.50 each year.

    In year 4 you will have a balancing allowance which will reduce your tax bill that year.


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